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# fm13 18 - High Average =(\$74.61/\$67.82 – 1 = 10 High...

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Mini Case: 13 - 18 Direct approach: From our previous analysis, we know the current value of the project and the value for each scenario at the time the option expires (year 1). Here is the time line: Current Value Value At Expiration Year 0 Year 1 High \$67.82 \$111.91 Average \$67.82 \$74.61 Low \$67.82 \$37.30 The annual rate of return is: High: Return = (\$111.91/\$67.82) – 1 = 65%.
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Unformatted text preview: High: Average = (\$74.61/\$67.82) – 1 = 10%. High: Return = (\$37.30/\$67.82) – 1 = -45%. Expected Return = 0.3(0.65) + 0.4(0.10) + 0.3(-0.45) = 10%. σ 2 = 0.3(0.65-0.10) 2 + 0.4(0.10-0.10) 2 + 0.3(-0.45-0.10) 2 = 0.182 = 18.2%. The direct approach gives an estimate of 18.2% for the variance of the project’s return....
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